Protection Planning for Minors
Minors and Estate Plans
There is no better reason to have an estate plan in place than for the wellbeing of your small children. Often, parents avoid estate planning because they believe they are too young, healthy or can’t afford an attorney. However, estate planning is a loving thing to do and a vital part of caring for your minors.
Appointing Guardians for Your Children
The most important part of an estate plan for young parents (link to Young Families page) is naming a guardian for the children. The guardian is the person who will care for the children should both parents die before the children reach the age of majority (18). Select someone you trust to raise your children and discuss your selection with the person before finalizing your will or, better yet, your living trust plan. When you make your selection consider the age of the person and whether they will be able to provide adequate care. Name a secondary guardian in the event the primary guardian is unable or unwilling to serve.
Planning for Your Children’s Financial Future
Wise parents also will provide for the financial future of their children. If both parents tragically die in a car accident before the children reach the age of majority, the children will not be able to receive assets outright. Rather, a person must be designated to handle the assets for the children. This person will have the authority to spend the children’s assets as they believe the parents would have under similar circumstances. You should have adequate life insurance with a trust as the beneficiary. In addition to a guardian, a trustee also is named to handle the finances for your children’s benefit. The guardian and trustee can be the same person or different people.
Frequently parents who do create estate plans create a living trust to hold assets for their children until they reach the age of 21 or 25. However, parents are beginning to spread out trust distributions, so each child receives small portions of money throughout part or all of their adult lives. This way, if a child is irresponsible at the age of 25, he or she will still receive some part of the inheritance but will not squander the entire amount.
Regarding planning for the future, there are numerous types of trusts available for children, including the following:
A Common Trust is available for minors. As you raise your children and spend your time and resources to care for them, you don’t necessarily expend the same amount of time or resources on each child. They each have different passions and interests. One of your children may have physical or emotional needs greater than the others. Most parents say they do not allocate their resources on a strictly “equal” basis. Rather, they direct their resources, whether limited or great, based on the need of each individual child.
A common trust allows your trustee to make the same type of decisions you would make because you set forth instructions in the trust; you select a trusted individual or organization to act as the trustee of money to be used for the benefit of your children in the event you are no longer alive.
The trust funds are available to benefit each child until the youngest reaches a stated age. This can be when your youngest child reaches the age of majority (age 18), or could be another age of your choosing, often 21, 23 or 25. Once your youngest child reaches the age you chose, the funds in the trust are split into separate trusts for each child. You can give the trustee instructions about how the money will be used until the trust terminates.
Staggered Distribution Trust
A Staggered Distribution Trust is a legacy or protective trust to spread the gifts out over time and then the trust will end at a designated time. Each adult child beneficiary has the right to take the assets out of the trust at the age or ages you determine, but the beneficiary could choose to allow the trust to continue as a convenience.
- You can set it up so that your adult child receives one-third of the money at 25, one-half at 30, and the balance at 35. You have the freedom to choose how you’d like to spread out the ages.
- If your child passes away, the trustee invests the share of the grandchild until the grandchild reaches an age you choose.
- If the grandchild wants anything, he or she lets the trustee know, and the trustee has some discretion regarding the grandchild’s expenses for health, education, and maintenance.
- If your child dies without having any children, the remaining assets will pass to the people who would be your heirs at law.
- This trust doesn’t leverage creditor protection benefits as well as other trusts if asset protection for your children is one of your primary goals.
A Dynasty Trust is a legacy or protective trust designed to last as long as there are assets in the trust. The trust may last for generations giving your children, grandchildren, and possibly your great grandchildren the ability to enjoy the gifts you are leaving and will enhance their lives over many years. However, depending on the value of the assets in the trust, income tax issues have to be considered too. A “Beneficiary Controlled Dynasty Trust” is worth evaluating as part of your overall estate plan.
The share of each child is held in a protective trust after your death. Here are the goals:
- Give maximum dignity of control to your descendants;
- Promote personal responsibility for them and for anyone they marry; and
- Protect the estate for them, for as many generations as possible, from:
- Their disability, inexperience, or lack of initiative if they receive too much money too young.
- Their own risk of loss to creditor claims, meaning lawsuits in our litigious society.
- Predators in our society (divorcing spouses of your children, or spouses of children who survive and remarry someone outside of your family.)
- Death taxes on all amounts that you can make tax-free when you die.
- Avoid guardian proceedings for grandchildren who may be disabled or too young to receive their inheritance on termination of trusts you have created for the benefit of your children.
Special Needs Trust
A Special Needs Trust is a protective trust for disabled minor or adult children. Special Needs Trusts are an exception to the rules that normally apply to trusts. Normally, a trust will be considered an “available asset” whenever someone applies for a means-tested government public assistance program such as SSI or Medicaid.
Unlike a traditional trust, a properly drafted and administered Special Needs Trust will not be counted as an available asset, and trust disbursements will not be counted as income under the rules that apply to SSI and Medicaid.